Families can buy long-term insurance for their children as a savings vehicle but most advisors say there are better ways to save for a child's future,
It sounds like a good idea, but most experts advise against purchasing life insurance for children when they are born.
The purpose of life insurance in most cases is to provide financial assistance to family members following the passing of an older family member. It’s a way to provide some stability when a family loses one of its main financial providers to death.
Most families are not dependent upon their children for financial support, and most financial advisors say any money put to a life insurance policy on a child would make more money in an investment with a better percentage of interest.
“There are two reasons to buy life insurance: to replace wages (to protect others financially) in the event of a premature death, or as a tax advantaged savings vehicle,’’ said Surevest Wealth Management president Jeremy Kisner in an interview with Fox Business. “It’s hard to make a good case that a child’s death would create a financial hardship and there are better savings strategies for children.”
It is true that there are costs incurred upon anyone’s death, and a life insurance policy on a child would provide some financial support at a time of great emotional upheaval for a family.
Life insurance policies taken out on children do accrue in value, and if a permanent policy is taken out, the policy will last through the child’s entire lifetime with the rate locked in through its entirety. But, when subtracting the sizable amount of money invested from the amount received upon death, it is not the best possible investment vehicle.
Many advisors say a better way to invest for your child is to put money into a college fund like a 529, which is designed to pay tuition costs when the child reaches college age. Your return on investment is known in advance, greater than the return on a life insurance policy but does not require the investor to watch rates and the stock market to know what will be available to them when the time comes.
Purchasing life insurance for children is a possible investment vehicle for families who are well off financially, and for those who are concerned about the future health of their child due to genetic matters.
Kent McDill is a staff writer for Millionaire Corner. McDill spent 30 years as a sports writer, working for United Press International and the Daily Herald of Arlington Heights, Ill. From 1988-1999, he covered the Chicago Bulls for the Daily Herald, traveling with them every day through the nine-month season. He also covered the Bulls for UPI from 1985-88, and currently covers the team for www.nba.com. He has written two books on the Bulls, including the new title “100 Things Bulls Fans Should Know And Do Before They Die’, published by Triumph Books. In August 2013, his new book “100 Things Bears Fans Should Know And Do Before They Die” gets published.
In 2008, he resigned from the Herald and became a freelance writer. The Herald hired him to write business features and speeches for the Daily Herald Business Conferences and Awards presentations.
McDill also writes a monthly parenting column for the Herald’s Suburban Parent magazine.
McDill is the father of four children, and an active fan of soccer, Jimmy Buffett and all things Disney.